A new report, Increasing Climate Ambition: Analysis of an International Carbon Price Floor, found that global carbon pricing could pay for itself while cutting emissions.
Written by the World Economic Forum and PwC, the report models the impact of an ICPF as proposed by the International Monetary Fund (IMF). If all regions and sectors participate, an International Carbon Price Floor (ICPF) for carbon dioxide and other greenhouse gas emissions could reduce global carbon emissions by up to 12.3% by 2030.
Although carbon pricing might at first reduce global GDP (by less than 1%), any such costs would be offset by avoided losses in GDP due to global warming. This is compared to the world economy shrinking by 18% and global temperatures rising by over 3°C if actions are not taken now.
“The results of analysis of the ICPF are extremely positive,” said Børge Brende, President at the World Economic Forum. “Public-private cooperation will be key for next steps and to accelerate efforts for a more sustainable and inclusive recovery.”
“The findings of our analysis are very encouraging,” said Bob Moritz, Global Chairman of PwC. “The political and technical challenges remain very significant, but we hope the research will encourage countries to consider pricing carbon in such a way that it scales up the effort to reach net zero in time to limit the worst effects of climate change on people and our planet.
- Emissions reduction – An ICPF could significantly reduce global emissions by up to 12.3% and help limit global warming to 2°C above pre-industrial levels.
- An international carbon price could pay for itself – The revenues raised and environmental impacts mitigated could offset or eliminate any adverse short-term economic effects
- ‘Carbon dividends’ could help lead to a just transition – An ICPF could raise up to 3% of GDP in revenues in some countries, which could be redistributed to those most disadvantaged by the transition away from fossil fuels
- Widespread participation would avoid “carbon leakage” – The involvement of low- and middle-income countries in an ICPF would help avoid a transfer of emissions-intensive manufacturing to countries where carbon prices are lower.
The report found that under an ICPF that applies to all carbon leakage would be limited, although this issue remains challenging. Today the cost of CO2 and other greenhouse emissions varies widely among regions, countries and industries. This creates an uneven playing field, which limits the incentive for some to reduce emissions.
Accordingly, the report underscores the vital need for globally coordinated action and widespread involvement in an ICPF to ensure a just transition to a net-zero world. The report finds that only 13% of the carbon pricing revenue generated in high-income countries would be needed to fully offset the GDP reduction in low-income countries, which may be considered as part of a just transition.
About the ICPF report
Increasing Climate Ambition: Analysis of an International Carbon Price Floor, developed with PwC, aims to help inform policymakers considering whether the IMF plan for an ICPF with different price points for emissions for economies at different stages of development can serve as the starting point for a more ambitious global agreement.
The authors used various economic models, including PwC’s International Computable General Equilibrium model, which estimates how the global economy might react to policy changes or external shocks. The analysis included 10 scenarios and a range of territories, sectors and greenhouse gases. A series of conversations with stakeholders in government, business and civil society helped identify key challenges from a variety of perspectives.
The authors of the report hope that their models and findings can inform further discussions and future initiatives, at the COP26 meeting in Glasgow.